Regulation

The Law That Saved Credit Card Borrowers $20.8 Billion a Year

Before Dodd-Frank, before the Consumer Financial Protection Bureau, there was the CARD Act, a bill passed in 2009 to rein in the ability of credit card companies to wring fees out of struggling borrowers. The law banned or limited a host of practices, including rate hikes without notice, and said card issuers could lend only as much as customers could reasonably repay. The new rules were phased in over 2009 and 2010, and yesterday the New York Times’s Floyd Norris highlighted a new study on the CARD Act that found the law to be “highly effective.”

Four researchers, including one from the Office of the Comptroller of the Currency, looked at 150 million credit card accounts. They estimate the CARD Act saved consumers $20.8 billion a year. Overall, the law reduced borrowing costs by 2.8 percent of average daily balances. For customers with lower credit scores, who paid the most on their cards previously, the savings jumped to more than 10 percent of average daily balances. That’s generally in line with findings of an October report from the Consumer Financial Protection Bureau, which calculated an overall decline of about 2 percent and a savings of 5.5 percent for “deep subprime” customers.

The report found that credit cards, which had been highly profitable, did produce less income for banks after the law was enacted. Revenue fell from 25 percent of the average balance down to 20 percent, a reduction that wasn’t fully offset by reduced costs. Card profit fell 18 percentage points for borrowers with FICO scores below 620, 9 percentage points for borrowers with a FICO score between 620 and 660, and 3 percentage points or less for borrowers with scores above 660.

Finally, the report directly dismissed two major criticisms that the industry has about the law. The researchers found that the law did not cause credit card issuers to jack up interest rates to compensate for lost fee revenue. They hypothesize that this is because the card issuers had to compete on interest rates when they market to borrowers. They also found that the law did not constrict the availability of credit. “During all implementation phases of the CARD Act, we observe a steady increase in the number of accounts,” they wrote. “Moreover, low FICO score groups, for which lenders experienced the steepest decline in total net income, show the fastest increase in the number of accounts over this period.”

By regulating hidden fees, the CARD Act made credit card income more dependent on up-front costs: the interest rate and annual fee. And the researchers found that when the market is based on clearer costs, consumers save money without losing access to credit.